Industry Talk: Afghanistan Seeks Taxes From Contractors To US

These guys kill me. What part of this bilateral agreement do the Afghans not understand? Here it is again, just to emphasize how stupid this is.

A 2003 bilateral agreement states the U.S. government, “its military and civilian personnel, contractors, and contractor personnel shall not be liable to pay any tax or similar fees assessed within Afghanistan.” A subsequent 2004 Military Technical Agreement also carved out a tax-free status for contractors to the U.S., a view that has been reinforced by U.S. officials in correspondence with Afghan officials.

We will see if the US can press back and protect these companies that are essential to the war effort. I think this quote says it all, if the US cannot square this away.

A person involved in logistics issues said the matter could come to a head if the Afghan government imposes fees or restrictions on cargo that slows the delivery of goods to forward operating bases, or FOBs. “We’ve been told [by the coalition] to reduce stocks. So they’ll run out of fuel and they’ll go on MREs on some of these FOBs,” the person said, referring to the military’s packaged rations. “And little Johnny’s going to call Mom, and that’s now going to be all over the press.”

We will see how it goes? –Matt

Afghanistan Seeks Taxes From Contractors to U.S.
By NATHAN HODGE
Afghanistan has launched tax audits of major contractors to the U.S. military, government officials say, in a bid to shore up the country’s finances as the international military presence winds down and reconstruction funds dry up.
In particular, Kabul is focusing on the U.S. military’s main food supplier in Afghanistan, Supreme Foodservice GmbH, alleging that the company and similar logistics firms are abusing their status to illegally bring taxable goods into the country for resale.
Supreme says it isn’t engaging in any commercial activity in Afghanistan that should make it liable for taxes.
Kabul’s move potentially puts the Afghan government at odds with Washington, which has viewed, with limited caveats, materials imported to support the 66,000 U.S. forces here as exempt from taxation and customs fees. Since 2005, the Pentagon spent more than $7.9 billion on its food-supply contract with Supreme alone, awarding the company an additional $1.5 billion extension contract this past summer.

Contractors working for the U.S. government have collectively “evaded hundreds of millions” of dollars in legitimate Afghan taxes every year by engaging in commercial transactions that aren’t supposed to be exempt from taxation, Afghan Finance Minister Omar Zakhilwal said in an interview.
“Most of them have violated our tax law,” Mr. Zakhilwal said. “Now they are coming more into compliance.”
U.S. officials have taken a different view. A 2003 bilateral agreement states the U.S. government, “its military and civilian personnel, contractors, and contractor personnel shall not be liable to pay any tax or similar fees assessed within Afghanistan.” A subsequent 2004 Military Technical Agreement also carved out a tax-free status for contractors to the U.S., a view that has been reinforced by U.S. officials in correspondence with Afghan officials.
“Typically, in bilateral agreements with governments around the world, civilian assistance has not been taxed,” said a U.S. official.
The Special Inspector General for Afghanistan Reconstruction, a U.S. government watchdog, is currently conducting its own inquiry into the Afghan government’s imposition of taxes, tariffs and fees on materials imported for U.S.-funded reconstruction programs. The agency disclosed the audit in a recent quarterly report.
Since 2001, the U.S. has allocated nearly $90 billion for reconstruction projects in Afghanistan, work that is largely performed by contractors. The U.S. military also depends on private firms to deliver food, fuel and other supplies to bases around the country.
At issue is more than the interpretation of the bilateral agreements that govern customs clearances and tax issues for contractors.
As international aid winds down, Afghanistan will need to offset the billions currently provided by the U.S. and the international community to sustain the country’s economy and pay for its military. Afghanistan last year took in around $2 billion in total revenue, according to the country’s finance ministry. Donors expect the country will need as much $8 billion per year in international assistance, more than half of it to fund the army and the police, for at least another decade. An expected revenue boom from mining and natural-resource exploitation has been slow to materialize; the sector currently contributes only $100 million or so a year, according to Afghan officials.
Afghanistan’s Large Taxpayer Office, which oversees tax collection for around 300 large companies and provides about 60% of the country’s tax income, has been working to bring in more revenue, according to its director, Subhanullah Fahimi. Several contractors “are under very serious audit” for alleged tax violations and back taxes, he said.
“They enter their cargo, their fuel, under the name of exempt cargo,” he said. “But they sell it on the market.”
Mr. Fahimi singled out Supreme, a unit of Netherlands-based Supreme Group that has been a food supplier to U.S. and coalition forces since 2002, for belatedly registering as a taxpayer in Afghanistan. “Until 2011, 2010, they did not file any tax return,” he said. “They had no record with the Ministry of Finance. No record. No tax payment, no compliance, no filing of tax returns. Nothing.”
Mr. Fahimi said the company was now “making good,” paying up to $20 million over the past two to three years to resolve tax issues.
Supreme, in a statement provided to The Wall Street Journal, said it had been unable to resolve its taxation issues. The main problem, the company said, was the Afghan government’s unwillingness to follow agreements that exempt contractors supporting the military mission in Afghanistan from taxes.
“We do not engage in any commercial activity in Afghanistan,” Supreme’s statement said. “The fundamental cause of this issue is the reluctance of [the government of Afghanistan] to adhere to the two bilateral agreements. Clearly, therefore, the resolution of the matter is outside of the control of Supreme Group.”
It isn’t clear whether U.S. taxpayers would ultimately have to refund the military contractors if they are forced to pay taxes to Kabul that, according to U.S. interpretation, contravene bilateral agreements.
The U.S. Agency for International Development “has a very clear bilateral agreement that development assistance is not subject to Afghan tax,” said Alan Chvotkin, executive vice president and counsel of the Professional Services Council, a trade group that represents government contractors. “Not quite so with contractors who are supporting Defense or State Department or others.”
“It’s of interest to the government of Afghanistan to generate revenue—even the U.S. government has been encouraging them to find sources of revenue to support their infrastructure,” Mr. Chvotkin said. “Therein lies the challenge.”
Several Afghan and international contractors contacted by the Journal declined to comment. Mr. Chvotkin said many companies were reluctant to speak publicly about the issue because of continuing negotiations with the Afghan government about their tax bills.
A person involved in logistics issues said the matter could come to a head if the Afghan government imposes fees or restrictions on cargo that slows the delivery of goods to forward operating bases, or FOBs.
“We’ve been told [by the coalition] to reduce stocks. So they’ll run out of fuel and they’ll go on MREs on some of these FOBs,” the person said, referring to the military’s packaged rations. “And little Johnny’s going to call Mom, and that’s now going to be all over the press.”
Story here.